A Look At The Intrinsic Value Of Guangdong Yangshan United Precision Manufacturing Co., Ltd. (SZSE:001268)

Key Insights

• Guangdong Yangshan United Precision Manufacturing's estimated fair value is CN¥13.97 based on 2 Stage Free Cash Flow to Equity
• Current share price of CN¥16.10 suggests Guangdong Yangshan United Precision Manufacturing is potentially trading close to its fair value
• Industry average of 336% suggests Guangdong Yangshan United Precision Manufacturing's peers are currently trading at a higher premium to fair value

In this article we are going to estimate the intrinsic value of Guangdong Yangshan United Precision Manufacturing Co., Ltd. (SZSE:001268) by taking the expected future cash flows and discounting them to their present value. We will take advantage of the Discounted Cash Flow (DCF) model for this purpose. Believe it or not, it's not too difficult to follow, as you'll see from our example!

Companies can be valued in a lot of ways, so we would point out that a DCF is not perfect for every situation. Anyone interested in learning a bit more about intrinsic value should have a read of the Simply Wall St analysis model.

View our latest analysis for Guangdong Yangshan United Precision Manufacturing

The Model

We use what is known as a 2-stage model, which simply means we have two different periods of growth rates for the company's cash flows. Generally the first stage is higher growth, and the second stage is a lower growth phase. To start off with, we need to estimate the next ten years of cash flows. Seeing as no analyst estimates of free cash flow are available to us, we have extrapolate the previous free cash flow (FCF) from the company's last reported value. We assume companies with shrinking free cash flow will slow their rate of shrinkage, and that companies with growing free cash flow will see their growth rate slow, over this period. We do this to reflect that growth tends to slow more in the early years than it does in later years.

Generally we assume that a dollar today is more valuable than a dollar in the future, and so the sum of these future cash flows is then discounted to today's value:

10-year free cash flow (FCF) estimate

	2024	2025	2026	2027	2028	2029	2030	2031	2032	2033
Levered FCF (CN¥, Millions)	CN¥48.9m	CN¥61.5m	CN¥73.2m	CN¥83.5m	CN¥92.5m	CN¥100.3m	CN¥107.1m	CN¥113.1m	CN¥118.5m	CN¥123.5m
Growth Rate Estimate Source	Est @ 35.66%	Est @ 25.83%	Est @ 18.95%	Est @ 14.14%	Est @ 10.77%	Est @ 8.41%	Est @ 6.75%	Est @ 5.60%	Est @ 4.79%	Est @ 4.22%
Present Value (CN¥, Millions) Discounted @ 8.7%	CN¥45.0	CN¥52.0	CN¥56.9	CN¥59.8	CN¥60.9	CN¥60.7	CN¥59.6	CN¥57.9	CN¥55.8	CN¥53.5

("Est" = FCF growth rate estimated by Simply Wall St)
Present Value of 10-year Cash Flow (PVCF) = CN¥562m

We now need to calculate the Terminal Value, which accounts for all the future cash flows after this ten year period. For a number of reasons a very conservative growth rate is used that cannot exceed that of a country's GDP growth. In this case we have used the 5-year average of the 10-year government bond yield (2.9%) to estimate future growth. In the same way as with the 10-year 'growth' period, we discount future cash flows to today's value, using a cost of equity of 8.7%.

Terminal Value (TV)= FCF₂₀₃₃ × (1 + g) ÷ (r – g) = CN¥123m× (1 + 2.9%) ÷ (8.7%– 2.9%) = CN¥2.2b

Present Value of Terminal Value (PVTV)= TV / (1 + r)¹⁰= CN¥2.2b÷ ( 1 + 8.7%)¹⁰= CN¥946m

The total value, or equity value, is then the sum of the present value of the future cash flows, which in this case is CN¥1.5b. To get the intrinsic value per share, we divide this by the total number of shares outstanding. Compared to the current share price of CN¥16.1, the company appears around fair value at the time of writing. Valuations are imprecise instruments though, rather like a telescope - move a few degrees and end up in a different galaxy. Do keep this in mind.

The Assumptions

The calculation above is very dependent on two assumptions. The first is the discount rate and the other is the cash flows. If you don't agree with these result, have a go at the calculation yourself and play with the assumptions. The DCF also does not consider the possible cyclicality of an industry, or a company's future capital requirements, so it does not give a full picture of a company's potential performance. Given that we are looking at Guangdong Yangshan United Precision Manufacturing as potential shareholders, the cost of equity is used as the discount rate, rather than the cost of capital (or weighted average cost of capital, WACC) which accounts for debt. In this calculation we've used 8.7%, which is based on a levered beta of 1.034. Beta is a measure of a stock's volatility, compared to the market as a whole. We get our beta from the industry average beta of globally comparable companies, with an imposed limit between 0.8 and 2.0, which is a reasonable range for a stable business.

Looking Ahead:

Although the valuation of a company is important, it shouldn't be the only metric you look at when researching a company. The DCF model is not a perfect stock valuation tool. Rather it should be seen as a guide to "what assumptions need to be true for this stock to be under/overvalued?" For example, changes in the company's cost of equity or the risk free rate can significantly impact the valuation. For Guangdong Yangshan United Precision Manufacturing, we've compiled three relevant aspects you should consider:

1. Risks: Case in point, we've spotted 2 warning signs for Guangdong Yangshan United Precision Manufacturing you should be aware of, and 1 of them doesn't sit too well with us.
2. Other Solid Businesses: Low debt, high returns on equity and good past performance are fundamental to a strong business. Why not explore our interactive list of stocks with solid business fundamentals to see if there are other companies you may not have considered!
3. Other Environmentally-Friendly Companies: Concerned about the environment and think consumers will buy eco-friendly products more and more? Browse through our interactive list of companies that are thinking about a greener future to discover some stocks you may not have thought of!

PS. Simply Wall St updates its DCF calculation for every Chinese stock every day, so if you want to find the intrinsic value of any other stock just search here.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.